Why is vertical farming failing and how can we save it?
Vertical farming, once hailed as the future of agriculture, is facing a tumultuous period. In this blog post, we'll explore the recent struggles faced by prominent vertical farming companies and the underlying reasons behind their failures. We'll delve into the challenges that have brought the industry to a crossroads and discuss what lies ahead for vertical farming.
Vertical Farming in Turmoil
The decline of AppHarvest's stock by over 95% since its initial public offering and the Chapter 11 bankruptcy protection declaration of another major player, Aerofarms, have raised concerns about the stability of the vertical farming market. Several once-promising companies like Fifth Season, Kalera, Infarm, Iron OX, and Upwards Farms have also encountered financial hardships, either going out of business or scaling back operations while letting go of a significant portion of their workforce. What is truly happening with vertical farming? Is the entire industry on the verge of a catastrophic collapse? Let's find out.
Why are vertical farming companies failing?
The past 36 months have been particularly challenging for vertical farming startups, and three key factors have contributed to their downfall.
1. The FOMO-Fueled Capital Surge:
During the last few years of low interest rates and non-stop good news on the stock-market, substantial amounts of easy capital flooded the vertical farming and Controlled Environment Agriculture (CEA) sector. Combined with the rise of sustainable investments, large investors clamored for the chance to fund the next big sustainable unicorn, often driven by the fear of missing out (FOMO). With almost endless amount of external capital flowing into selected startups, many of these previously hyped vertical farming companies started relying heavily on this continuous flow of outside capital, neglecting the importance of building sustainable business models. As the financial markets tightened and investor money dwindled, many of these startups found themselves ill-prepared to sustain their businesses independently, leading to bankruptcy or massive layoffs.
2. Questionable Business Models:
A significant contributor to the downturn has been the questionable business models adopted by some vertical farming startups. Eager to impress investors, many companies focused almost exclusively on creating state-of-the-art, AI-driven facilities that had more resemblance to automated car factories than vegetable farms. Not only did these technologically advanced setups come with sky-high capital expenditures but they would still require high operating costs, while the produce—predominantly leafy greens and lettuce—struggled to compete with conventionally grown alternatives in terms of price and sales margin. The high operating costs and low margins combined with unrealistic expected returns by venture capitalists made it challenging for vertical farming companies to achieve profitability.
3. Horrible Unit Economics:
Even with massive capital investments that optimise production efficiency through automation, many vertical farms suffered from poor unit economics. High operating costs, such as comparably high energy consumption and salaries for specialised personnel, put a strain on their profit margins. Furthermore, the unwillingness of consumers to pay a premium for vertically produced salads and leafy greens added to the financial woes. Consequently, many of the vertical farm startups, some of which had been funded by hundreds of millions, simply ran out of cash, struggling to weather the storm.
4. Vertical farming does not scale like SaaS businesses
All of the issues above speak of a prevalent issue that has been plaguing the vertical farming industry – unrealistic growth expectations. Scaling a vertical farming business is unlike the growth strategies employed by typical Silicon Valley Software as a Service (SaaS) companies. The resource-intensive nature of the vertical farming industry not only makes it hard for the business to break-even but it also makes it challenging for any industrial farms to pivot or downscale production once substantial investments have already been committed. The industry's excessive hype and lack of transparency only exacerbated the situation, leading to the current market adjustment with many of the previous market darling either going under, or being forced to scale back their operations.
The Future of Vertical Farming
Despite the current challenges, the future of vertical farming remains positive for companies that can strike a balance between technological advancements and sustainable business fundamentals. Indeed, we expect that the focus on the market will shift from flashy facilities to integrating selected cutting-edge technologies with economically viable business models. Companies willing to survive will have to start focusing more on good unit economics, cost-cutting measures, consistent operations, healthy cash flows, and building long-term customer relationships.
A New Era of Innovation and Adaptation
While the recent failures have painted a gloomy picture of vertical farming as a whole, the current state of the vertical farming industry presents a true opportunity for innovation and adaptation. Entrepreneurs and industry players must learn from past mistakes and refine their approaches to thrive in the evolving landscape. Collaboration between startups, research institutions, and agricultural experts is essential to harness the full potential of vertical farming. We believe that vertical farming is here to stay, just not necessarily in the manner that we been getting used to.
Redefining Success Metrics
Considering what we’ve stated above, the notion of success in the vertical farming industry must evolve and move beyond mind-boggling capital returns defined by venture capital investment strategies. While investor money will definitely still be flowing into the market, companies operating in the industry need to embrace a broader definition of success that encompasses environmental sustainability, social impact, and long-term financial viability. By incorporating these elements into their core values, vertical farming startups can demonstrate resilience and keep attracting investors regardless of the issues we’ve seen in the past.
Addressing Environmental Concerns
Sustainability is not just a buzzword; it's a necessity. Vertical farming, with its potential to reduce the environmental impact of agriculture, must take meaningful steps toward achieving this goal. While energy efficiency, water conservation, and responsible waste management are still at the forefront in the vertical farming industry, companies must goes further than that and start embracing proper and transparent reporting standards. While the new European Sustainability Reporting Standards (ESRS) will provide companies a standardised tool for ESG reporting, we think that vertical farming companies have to go even further reporting in more detail regarding the resources used per kilo of production. While no such market-wide standards yet exists, we think that the Sustainability Communications tools developed by Agritecture are a good place to start from.
Conclusion: Embracing Sustainability
Vertical farming has reached a pivotal moment in its evolution, where only the most resilient and adaptive companies will thrive. This period of market correction is natural in the development of any new industry. The success stories will arise from those who learn from past mistakes, refine their approach, and prioritise sustainability as an integral part of their business model. With the right strategy and a commitment to addressing environmental concerns, vertical farming can still live up to its promise of revolutionising the future of agriculture. By embracing innovation, collaboration, and environmental responsibility, vertical farming can rise from the ashes and sow the seeds of a sustainable and prosperous future for generations to come.